Think 3% is small potatoes? It can eat your life savings

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If you heard that Macy’s












M, +1.15%










 was holding a “Blowout 3% Off Sale,” you’d rightfully think the discount was almost nothing. A mere 3% price cut would hardly make you go out of your way to shop someplace.

Unfortunately for investors, a 3% haircut in advisory fees and fund expenses—a level that’s all too common—makes a huge difference in how fast your wealth grows. If you add up all of the fees in your portfolio, it may reveal a “silent killer” that can devastate your account balances over your working career or a lengthy retirement.

For example, let’s say your financial adviser or 401(k) plan provider charges an annual fee of 1% of assets under management. In addition, your monies are directed into “house funds” that charge expense ratios of 2% (which may be hard to discover).

The result is that an account starting with $100,000 would be worth less than half as much over a 30-year career or retirement as if you hadn’t paid the fees. Even worse, your market gain could be only one-third as much as it would have been without you paying those fees.

Searching for and eliminating fees is part of what I call “wallet wellness.” It’s remarkable how much more of your money you can keep, compared with “leaky wallet” investors who pay high fees every year.



Imagine that you inherit $100,000. You invest your windfall in a balanced portfolio of exchange-traded funds, allocating 50% to U.S. stocks and 50% to bonds:

• Your balanced portfolio would grow at an annualized rate of 6.55%, based on a recent 43-year period, after adjusting for dividends and inflation and subtracting today’s ETF fees.

• For comparison, the S&P 500












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 delivered almost exactly the same real (inflation-adjusted) total return over the same period—just 0.2 percentage point higher than the balanced portfolio.

• In the accompanying graph, the top line represents an investor with “wallet wellness” who pays no fees, other than the almost-zero expense ratios of today’s ultra-low-cost ETFs. For example, the Vanguard Group offers VTI












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which tracks all U.S. stocks for only 0.03% annually, and BND












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tracking all U.S. bonds for only 0.04%. Those fees would take only $30 or $40 each year from a $100,000 account.

• The smart investor ends up with a balance of more than $670,000.

• The lower line shows an investor with a “leaky wallet.” He or she wound up with less than half as much: only $269,000.

• Even worse, the investor who paid 3% in fees had a gain on the original $100,000 of only $169,000. The informed investor gained $570,000. That’s more than three times the gain.

Now that you’ve seen the difference, you might think, “Heck, everyone knows that. People have already eliminated fees on their accounts.”

I wish it were that easy. The painful truth is that a lot of people with 401(k) plans and managed investment accounts don’t know the damage that seemingly small fees can do to their lifetime returns:

• A 2015 study by Morningstar reported that the average annual fee for “house” mutual funds was 1.17% at Wells Fargo












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1.20% at Goldman Sachs












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and 1.24% at Morgan Stanley












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That’s in addition to the annual management fee that wealth managers charge their clients, which can be 1% or higher.

• You may not even know you’re paying these fees. Deutsche Bank












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 brokers “invest about 34 percent of their client accounts in the bank’s own investment products,” according to a 2014 investigation by the New York Times. More than 50% of clients’ money at Goldman Sachs was routed into the firm’s house funds or to its external managers, the newspaper said.

• Even if you manage your own money, you aren’t safe from fees like these. About 10% of all investors in U.S. equity mutual funds pay an average expense ratio of 2.02%, according to the 2019 ICI Investment Company Fact Book. The fees are automatically deducted from each fund’s net asset value. You’ll never see an invoice.

• Additionally, U.S. investors purchased more than $300 billion worth of mutual funds with “front-end loads” in 2018, according to the Fact Book. ICI defines a load as a sales charge of more than 1%, but it can be many percentage points higher. The load primarily goes to advisers who recommend that their clients buy such funds. About 12% of all long-term mutual fund net assets are in funds with front-end loads, as of December 2018. (The accompanying graph assumes no front-end load.)

• In his book “The Four Pillars of Investing,” investment manager William Bernstein writes: “It is not unusual to see accounts from which as much as 5% annually is extracted.”

• Imagine that an advisory firm transfers 3% of an investor’s assets under management (AUM) to itself each year. The company invests the transferred money, obtaining the same 6.55% real return, but not charging itself any fees. By the 30th year, the firm will amass a total of over $400,000. That’s a bigger balance than the leaky-wallet investor ends up with. Talk about full service.

I calculated these surprising numbers while talking to Fred Pfaff, the president of Fred Pfaff Inc., a marketing firm I contract with. “If the investor who pays 3% loses so much money,” he asked me, “how much would a person end up with if they didn’t pay the fees?”

The answer is an account balance that’s over twice as high and a gain that’s more than three times as much. You could call this the Pfaff Graph.

Don’t be a sucker. Find out how much you’re paying in management fees, expense ratios, and mutual-fund loads. Then do your best to move your money into accounts and ETFs that truly keep your expenses down to a small fraction of 1% a year.

It’s reasonable to pay fees by the hour for professional advice on financial planning, wills, trusts, and other important legal documents. Just don’t pay 1%, 2%, 3%, or more of your AUM for the rest of your life on wealth-management fees, solely due to a failure to check out how much you’re being dinged.



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